Bremmer on State Capitalism: Two Paradoxes

Ian Bremmer's The End of a Free Market is a superb quick read, built on two paradoxes.

First paradox: this is a book likely to be be read end enjoyed most by people who believe they already know everything in it. They will be wrong, of course: at the very least, Bremmer brings together into one place a range of gritty data about the diversity of strategies by which different countries play a role int he market. But aside from the detail, there is a core of half-truth to the insight that they've heard it before. That is: what Bremmer does here is to bring into focus or articulate a notion that has been floating around in the air there, waiting to be written.

The seeds took root around the collapse of the Soviet Empire beginning in 1989. It was Francis Fukayama who blew the whistle and rang the bell. Now that we have thrown off the shackles of communism, he argued, we can all advance together into (19th Century) free-market liberalism; we can all go to the seashore.

I often wonder how Francis Fukayama dares show his face in public any more because it is hard to think of any public pronouncement in recent years that has proven more crashingly, smashingly wrong.* But that is his affair; for the rest of us, the intervening 20-odd years have been a series of rude, sometimes brutal a reminders that the death of state socialism did not bring the death of state capitalism; quite the contrary it is the very decline of state socialism that has to facilitate the advance of its evil twin.

As with so many important ideas, in retrospect it should have been obvious. I mean, consider: in the long chronicle of human endeavor, the idea of "a free market state"--a state whose only job is to facilitate a free market--is one of the oddest, most non-inevitable, most counter-intuitive. Before Adam Smith, just about nobody thought of a state that way. Hardly surprising that so many don't get it yet.

Aside from crystallizing the hitherto non-obvious, I suspect that Bremmer's greatest contribution is his catalog of the number of different ways that a state can involve itself in economic activity. Of course it can simply "run everything"--an option which, happily, few or no states currently embrace. More conventionally, it can find itself the proprietor of a huge pool of hydrocarbons which it chooses to manage itself, thank you, rather than turning it over to ExxonMobile or Chevron (fun fact: "the fourteen largest state-owned energy companies control twenty times as much oil dna gas as the eight largest multinationals.")

But these are only the beginning, and I suspect the chief virtue of Bremmer's detail is the way it helps to stimulate concern over just what we mean when we talk about "government" activity in the "free market." Norway has a formidable sovereign wealth fund (H/T, North Sea Oil). Is this "okay" because Norway operates at a high standard of accountancy and transparency? Is it good or bad that the Norwegian fund refuses to invest in Wal-Mart?

Or consider India where the government, lacking the political will to privatize dinosaur state industries, has chosen instead to force these companies, though public, to operate more and more like their private competitors? Or the United States, which still runs a post office. Do we count this as "the government" engaging in "private" activity? Or is it merely the government providing an essential state service? And if we are going to privatize the post office, what about the police? Or perhaps better, since we already have privatized so much of the police, why bother hang onto a post office?

All of this is stimulating stuff, raising 100 questions that one might not have thought of without Bremmer's presentation. All of which leads me to my second paradox: Bremmer's book is perhaps best understood as the first-draft intro to another book which remains to be written. That second book would be: just how, exactly,do we distinguish between "proper" and "improper" state economic activity--particularly in an age of sovereign states. If the post office is not an essential economic activity, then how should we feel about China National Offshore Oil Corporation (CNOOC) and its thwarted takeover of Unocal (Bremmer calls Unocal "a U.S.-owned oil company." Really? Are we certain that most shares of Unocal are held by citizens of the United States? Does it matter?). Is there really any need for a "Committee on Foreign Investment in the United States"--or is any effort to control foreign investment simply the inappropriate interference of the state in the activities of the market?

I don't mean to impute to Bremmer the more absurd of these suggestions. For all I know he doesn't accept any of them, and he may even have good reasons for rejection of them. My point is that Bremmer on state capitalism points out as starkly as ever I've seen them some of the more destabilizing inconsistencies between the idea of "the government" and that of "the market."
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*Two qualifications: I suppose it is almost a requisite of recognition as a great social thinker that you be wrong on your fundamental premise. Think of Marx on communist utopia; Hayek on how Atlee would lead us to fascism; Schumpeter on how we would congeal into a cold bureaucratic soup. As to "crashingly wrong," maybe there is another candidate: Michael Jensen declaring tht “I believe there is no other proposition in economics which has more solid empirical evidence supporting it than the Efficient Market Hypothesis.” Link, with context.